Global

A Side-by-side Analysis of Cimarex Energy Co. (XEC) and The Scotts Miracle-Gro Company (SMG)

Cimarex Energy Co. (NYSE:XEC) shares are down more than -27.30% this year and recently decreased -1.31% or -$1.18 to settle at $88.70. The Scotts Miracle-Gro Company (NYSE:SMG), on the other hand, is down -19.92% year to date as of 06/13/2018. It currently trades at $85.68 and has returned 1.16% during the past week.

Cimarex Energy Co. (NYSE:XEC) and The Scotts Miracle-Gro Company (NYSE:SMG) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect XEC to grow earnings at a 51.35% annual rate over the next 5 years. Comparatively, SMG is expected to grow at a 9.20% annual rate. All else equal, XEC’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 17.84% for The Scotts Miracle-Gro Company (SMG). XEC’s ROI is 11.70% while SMG has a ROI of 15.50%. The interpretation is that SMG’s business generates a higher return on investment than XEC’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. XEC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.35. Comparatively, SMG’s free cash flow per share was -5.50. On a percent-of-sales basis, XEC’s free cash flow was 1.74% while SMG converted -11.53% of its revenues into cash flow. This means that, for a given level of sales, XEC is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. XEC has a current ratio of 1.50 compared to 1.80 for SMG. This means that SMG can more easily cover its most immediate liabilities over the next twelve months. XEC’s debt-to-equity ratio is 0.54 versus a D/E of 4.63 for SMG. SMG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

XEC trades at a forward P/E of 10.09, a P/B of 3.02, and a P/S of 4.06, compared to a forward P/E of 18.68, a P/B of 9.86, and a P/S of 1.90 for SMG. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. XEC is currently priced at a -30.12% to its one-year price target of 126.94. Comparatively, SMG is -12.28% relative to its price target of 97.67. This suggests that XEC is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. XEC has a beta of 1.13 and SMG’s beta is 0.26. SMG’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. XEC has a short ratio of 3.41 compared to a short interest of 5.42 for SMG. This implies that the market is currently less bearish on the outlook for XEC.

Summary

Cimarex Energy Co. (NYSE:XEC) beats The Scotts Miracle-Gro Company (NYSE:SMG) on a total of 10 of the 14 factors compared between the two stocks. XEC is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, XEC is the cheaper of the two stocks on an earnings and book value, XEC is more undervalued relative to its price target. Finally, XEC has better sentiment signals based on short interest.

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